Pre-Seed Rounds Aren’t Going Away, But Pre-Seed Funds Are

Over the past few years, “pre-seed” as a distinct category has emerged within the early stage fundraising landscape.  To some degree the best way to describe a pre-seed round is that you know it when you see it, as the definition is squishy… but most pre-seed rounds are characterized as relatively small ($750K or less), early in company formation (pre-product), and typically followed by a larger “seed” round ($1M-$3M) within 12 months.

But this financing contour description is just a proxy for underlying business metrics.  In reality, a pre-seed is “an early round of financing that is designed to help a company achieve certain intermediate milestones PRIOR to the magic combination of strong PMF + meaningful traction.”

In other words, the goal of a pre-seed round isn’t to subsequently raise a Series A (which these days requires both product-market fit and meaningful evidence of strong market demand), but to raise another round of seed financing.

Of course, as a labeled category of financing arose, so did a number of dedicated pre-seed funds emerge to specialize in it.

With many of the established “traditional” seed funds having gone on to raise (relatively) larger funds and thus gravitating to commensurately larger-sized later seed rounds, a few years ago a temporal opportunity opened up for venture funds to exclusively focus on the very earliest of company formation historically addressed by what were called seed funds.


Where Have The “Pre Seeds” Gone?

Yet today many of the pioneers of “pre-seed funds” are no longer using the term pre-seed to describe themselves on their websites.  Instead, phrases like “first check,” “invest earlier than anyone,” and “people over product at the earliest stage” are increasingly more commonplace.

Others formerly exclusive to this category instead actually now position themselves as both “seed and pre-seed.”  And there are many historically “seed” firms now saying that they now also do “pre-seed” as well.  What gives?

The first thing to remember is that VCs have a fear of mispositioning themselves out of a set of opportunities, not just in terms of stage, but also sector, geography, etc.  A firm would ideally rather see an investment opportunity and pass, rather than not see it at all.

So even if the earliest of concept stage investment is a rarity addition to its portfolio, venture firms cite a lone example as illustrative of their broad openness to companies and founders of all types.  So it’s only natural that seed firms would slap the pre-seed moniker on top of what they do, too… after all, what’s the harm?

On the other side of the equation, as pre-seed firms have become more established, they too have raised larger funds and have the capacity to write checks of more than just a couple hundred thousand dollars which they were structurally constrained to previously.

And why automatically exclude yourself from a round with a founder who you know who has the ability to raise a slightly larger round from the outset even it’s at the rawest of company formation milestones?


A Symptom, Not A Cause

The reason for all of the confusion around defining pre-seed vs seed, and which firms do what, is a symptom, not a cause.  This is because there isn’t an abstracted and generalizable bright line about what are the salient business milestones which are included in one round profile vs. another. 

It really does depend from startup to startup.  The real bright line comes later: extensible & repeatable product-market fit with evidence of strong market demand traction justifies a Series A financing.

The milestones and the funding rounds to accomplish everything before that are much more specific and idiosyncratic to the specific startup based on the business model, sector, team composition, etc.

We at NextView Ventures believe that the seed stage is a spectrum.  A continuum.  You can throw different monikers on various seed round profiles, but the differences are really just gradations until the clear distinction of a product-market fit Series A and commensurate traction.

The amount raised in a round and the goals associated with it during a seed just don’t always fit into a neat bucket.  (Here’s a more detailed blog post about how my partners and I approach pre-seed rounds with conviction.)

A pre-seed round, one which is a company genesis financing not necessarily intended to fuel the company to complete product-market fit, is here to stay.  In fact, they’ve been around even before the pre-seed term emerged prevalent to describe them.

However, externally exclusively defining a venture firm strategy with the phrase can be challenging, as “pre-seed” becomes diluted by too many market participants wanting to raise their hand too, when the shades of seed definition become nuanced and tough to generalize.